Japan’s Dai-ichi Life turns US$260 billion portfolio back to JGBs

DAI-ICHI Life Holdings, one of Japan’s largest institutional investors, is shifting more money to domestic bonds from Treasury and other foreign securities, after aggressive interest rate increases by the Federal Reserve made it costly to hedge against currency risks.

“Assuming a certain level of the interest rate gap to remain, I think it’s difficult to increase hedged foreign bond investment. So basically, they are to be reduced,” Tetsuya Kikuta, the firm’s incoming president, said in an interview, referring to the difference between US and Japan short-term rates that affects hedging costs. 

The nation’s largest listed life insurer is increasing investments in super-long Japanese government bonds like 30-year and 40-year notes to match the duration of its liabilities, which are made up of insurance policies spanning decades, according to Kikuta, the firm’s current chief financial officer who’s set to take on his new role on April 1. Dai-ichi’s core unit manages a portfolio worth about US$260 billion. 

Dai-ichi and rival life insurers in the country were among the biggest holders of foreign bonds as a result of the Bank of Japan’s decade-long stimulus drive, which drove down returns from JGBs and other domestic investments. While they typically hedge currency risks for the bulk of their overseas bond bets, the costs of protection have shot up alongside the Fed rate hikes. 

The three-month hedging costs on dollar-yen have risen beyond 5 per cent, from below 1 per cent a little over a year ago, decimating extra returns Treasuries and other foreign bonds are supposed to generate over JGBs. That prompted Japanese investors, including its insurers, to sell overseas bonds at a record pace in 2022. At Dai-ichi, its hedged foreign bonds tumbled to 8.6 per cent of its core unit’s portfolio at the end of December, from about 19 per cent at the end of March 2021. 

Still, switching to JGBs alone won’t generate enough returns, according to Kikuta. “Yen bonds are core of our investment, but in order to boost our performance, I think alternative investment will increase,” he said, citing private equity, real assets and hedge funds as options. “This is a very important field.” 

Kikuta, who rose through the ranks in the company’s investment operations, said his company may spend more on share buybacks so it can achieve targets on how efficiently it uses capital. 

“We have been buying back quite large amounts of shares in comparison with our annual cash flow. We are doing that because our return on equity is lower than costs of capital,” he said. “When we can reverse them, we will use the cash flow for growth investment.” Deals worth about US$1 billion are possible, rather than multi-billion dollar acquisitions, and Dai-ichi has already been doing these, he said. 

The Japanese insurer has been an active dealmaker, completing more than US$12 billion of transactions over the past decade, according to data compiled by Bloomberg. Its biggest acquisition was buying Protective Life Corp. in the US in 2015 for more than US$5 billion. More recently, last year, Dai-ichi bought New Zealand-based life insurer Partners Group Holdings for US$608 million. 

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“We would like to consider inorganic opportunities in North America and Asia-Pacific regions,” Kikuta said. “We would also like to consider if there are asset management companies that have an edge in overseas fixed-income and credit assets.”

Through these moves, Kikuta wants to increase Dai-ichi’s market capitalisation to 6 trillion yen (S$60.4 billion) in four years, more than double where it stands today, and to 10 trillion yen in fiscal 2030.

“Global top-tier insurance groups have market capitalisation of 8 to 10 trillion yen,” he said. “If we are to aim for top-tier positions, we have to go for that scale in corporate value.” BLOOMBERG